Life Insurance Corporation(LIC) has been slated to bail out Infrastructure Leasing & Financial Services Limited (IL&FS) soon.
In this context, the government is facing criticism for making LIC to acquire stakes in multiple failing Public Sector Undertakings (PSUs).
What is the situation in IL&FS?
Infrastructure Leasing & Financial Services Limited (IL&FS) is a PSU.
It is jointly owned by the State Bank of India (SBI), LIC, ORIX (Japan), Abu Dhabi Investment Authority and Greenspring Associates.
Notably, the India's longest tunnel “The Chenani-Nashri Tunnel”, which was opened for traffic in 2017, was constructed by it.
The company is classified as systematically important due to its projects.
But IL&FS and its maze of subsidiaries have not made profits for almost a decade now and are in deep financial dept.
What is the bailout plan and what are the problems in it?
LIC’s Role - Presently, as LIC’s profits are strong, the central government is nudging it to acquire stakes in failing PSUs to bail them out.
While the LIC currently holds 25% shares in IL&EF, it has been slated to acquire more stakes and take up a greater role in IL&EF’s operations.
Notably, LIC is already in the process of acquiring the loss making IDBI Bank, presumably due to government’s insistence.
The Problem - LIC is India’s largest insurer and the public trust it with the belief that it would be secured through prudent investments.
Notably, there are more than 200 million policy holders in LIC, who would want their money back at times of emergency.
But LIC, like other well performing PSUs is being nudged to bail out multiple failing PSUs, a trend that might harm its balance sheets.
In other words, policyholder’s money has been shifted to make the government’s holdings look better.
What is the larger picture?
Fiscal Risks - Due to its financial strengths, LIC has been a stalwart in acquiring public sector companies that the government puts up for disinvestment.
This is in effect underwriting the purpose of disinvestment and is helping in channelizing depositor money to finance government’s fiscal deficit.
Governments should not dip into its people’s saving (like LIC deposits) to fuel its short-term goals and to sustain its borrowing spree.
Regulation - Deposits seeking long term returns should be responsibly managed by seeking appropriately safe and remunerative investment options.
Considering the LIC’s reckless investment outlook, Insurance Regulatory and Development Authority of India (IRDAI) should take notice.
But the IRDAI has largely been absent in the context of these acquisitions by the LIC, which is not a healthy sign.
